Series A vs. Series B Funding: What is the difference?

By reComparison Contributor

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Difference between Series A Funding and Series B Funding

Any business will benefit greatly from seed capital, but its what happens next that really makes a differences. For purposes of funding a business venture, it is important to know the differences between Series A and Series B financing, and that is exactly what we tackle here.

Definition

Series A financing is considered when a business is generating some revenue, although not necessarily making a profit. Most Series A financing come from venture capital funds or angel investors who are willing to accept a certain amount of risk in the early stages of a company’s development. With the subsequent growth of the company and the need for additional capital, subsequent series of preferred stock are issued to investors if the business has issued its IPO (initial public offering). Next up is of course Series B, which is followed by Series C, and so on. This gives investors a clearer picture of how they stand with regard to claims on future profits in the company. The business in question is also usually revalued before each stage of financing. This means that the terms of conversion may differ greatly for each series, depending on the company’s value at each stage.

Details

Series A is typically the source of funds during the initial stock offerings of a portfolio company to venture capital sources. The preferred stock in this series can usually be converted into common stock in the event of an IPO or if the company is sold. As you can imagine, Series A funding is very important during the initial stages of a new company. These funds typically range from $2 million to $10 million, which is meant to capitalize a company for a period ranging from 6 months to 2 years. This gives the company the opportunity to develop products, launch its initial marketing strategies, implement branding, hire employees, and perform other operations necessary at the start of the business. With each subsequent series, higher amounts of funding are sourced.

In Practice

For many businesses, initial funding comes from friends and family. These funds typically amount to $500,000 or less. So-called angel funds also come in around this time, which may amount to about $100K each. After this stage, Series A follows. Ideally, 20 or more venture capitalists should be involved in this step of the process. You will want to start your pitch with VCs with whom you aren't really that eager to do business with, and then later move to the ones with whom you are more interested to have investing in your company. This allows you to ramp up your presentation to be as effective as possible by the time you face your real potential investors. In Series A, you may end up giving away anywhere from 20% to 50% of your company to investors.

Series B funding is usually a lot easier to procure than Series A funding, since you will have garnered a vetted entrepreneur status for your company at this point. VCs at this point won't really need to do as much research as Series A investors, since much of the research work has already been done. Series B funding typically ranges from $5 million to $15 million. At this stage, you can expect to give away approximately 20% of your company.

Similarities and Differences

Series A

Considered when a business is generating some revenue, although not necessarily be making a profit

Financing come from venture capital funds or angel investors that are willing to accept a certain amount of risk